MUMBAI (Reuters) - State Bank of India(SBI.BO) posted its fastest profit increase in a year on rising net interest income, highlighting the attraction of Indian banks from foreign investors and sending shares in the country's biggest lender to a record high.

SBI and rivals such as ICICI(ICBK.BO), India's No. 2 lender, are seeing an improvement in asset quality as consumer loan defaults slow in an economy forecast to grow about 8.5 percent this fiscal year.

Bank credit in India grew at an annual 19.7 percent in July, according to the central bank's data, in tune with a rise in business and consumer confidence, up from 9.7 percent in October and compared with 16.7 percent at end-March.

Analysts expect credit growth to gather pace in the second half of fiscal year 2011 as industries will need more funds to expand operations.

State-run SBI said on Thursday net profit rose 25 percent to 29.14 billion rupees ($621.3 million) in April-June from 23.30 billion rupees a year earlier, the biggest percentage gain since the first quarter last year.

"Net interest income is looking very good. Going forward, I think this growth should continue as, in a rising interest rate environment, SBI is best positioned in the sector," Vaibhav Agrawal, an analyst at Angel Broking, said.

SBI's shares closed up 6.9 percent at 2,784 rupees after the results, outperforming the broader market that ended flat. The shares had earlier jumped as much as 7.5 percent to a record high of 2,797.80 rupees.

SBI's net interest income grew 45.4 percent to 73.04 billion rupees in the June quarter, from a year earlier, above forecasts of 65.95 billion rupees for the period.

Net non-performing assets at SBI were at 1.7 percent in April-June compared with 1.55 percent a year earlier.

Last month, ICICI Bank met estimates with a nearly 17 percent rise in net profit while HDFC Bank, the second largest private lender in India, posted its strongest profit growth in more than a year.

Credit Suisse said on Thursday it had received a licence from the Reserve Bank of India (RBI) to set up a bank branch in Mumbai. Eighteen foreign banks have approached India's central bank for opening their maiden branches or representative office in India.

The RBI on Wednesday said it intends to grant a limited number of new bank licences, a move that was earlier flagged by the government to expand the geographic reach of the sector.

In a discussion paper on the subject of entry of new banks, the RBI has invited comments on the minimum capital requirements as well as promoters shareholding in new banks.

"The RBI is going to give licenses only to serious contenders and that's why the criteria for selection will be very stringent," Deven Choksey, chief executive of K.R. Choksey Shares and Securities, said.

Shares in SBI, valued at about $36 billion, have risen 22.7 percent so far this year, versus a 3.5 percent rise in the main index, and a 20 percent jump in the sector index.

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